2012 CFA Exam, Question 1

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rellison

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(I know this has been asked elsewhere, but those are old threads and who knows if those people are around to answer anymore.)
1) N=15; PV=-650000; FV=1600000; PMT=-25000. When calculating I/Y for the required return, why is PMT=-25000? The explanation I have read is “they are adding to the account not paying out of it.” How is the $25000 being added to account?
2)Is the $30000 to support youth leagues included already, or what? It is not an itemized amount anywhere in the cash flows.
 
1) he’s contributing to his retirement . PV + cash inflow + return = FV
2) 30k is already accounted for apart of his normal living expenses. It’s not withdrawn from the portfolio
 
I don’t think the 30k one is a fair question. It’s very misleading. In reality you won’t get confused whether it should be included or not, because it should be spelled out in the front with the client.
I’m wondering how many people can get that correcly.
 
Very tricky, but the key is that the 30k is part of his normal expenses.
 
I got #1 wrong as well because the signs I used on PMT and PV were different. I think that’s the way to remember it is inflows should have the same sign as the PV.
 
I don’t have the question in front of me but from what I remember, the question clearly states:
1) He will contribute 25,000 annually to his retirement account
2) As part of his normal expenses he will dontate 30,000 to a youth soccer league
As far as the signs go (-\+) I’m not sure if we will be graded on wheather we use - for inflows or + for inflows but as far as I understand, if you keep them consistant (only use - for inflows, in this case the initial value and the 25,000 annual contribution) the answer will be correct.
 
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